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Banks could lose control of benchmark gold price fix

James Titcomb

The way that international gold exchange price has been set has remained unchanged for nearly a century. Photo: Bloomberg

Banks could lose sole responsibility for setting the gold price benchmark under new rules proposed by the industry.

Other parties such as miners and refiners may enter the London gold fix, which has been controlled by banks for almost a century but has come under scrutiny following allegations that the system is open to manipulation.

At a summit held by the World Gold Council (WGC) on Monday, regulators, banks and investors convened to discuss options for the fix, the gold price benchmark that influences trading in the precious metal.

The fix is currently decided twice a day by four banks – HSBC, Barclays, Scotiabank and Societe Generale – who reach a consensus based on submissions from each party.

However, it has been heavily scrutinised following scandals related to Libor, another key benchmark. Britain's Financial Conduct Authority (FCA) fined Barclays £26m earlier this year for failings related to the fix, and MPs were told last week that the market was possibly rigged.

Politicians on the UK's Treasury Select Committee called for the FCA to investigate manipulation of the fix, after its head of market infrastructure and policy, David Bailey, said that participants in it are potentially able to distort the benchmark.

Natalie Dempster, managing director for central banks and public policy at the WGC, said those involved in Monday’s negotiations agreed that other bodies were needed in the gold fix.

“What people wanted to concentrate on was getting more parties involved, end users such as refiners or miners,” she said. The WGC has also proposed that the fix be supervised by a disinterested party, and that it is based on actual trades, rather than submissions from banks.

Although there is appetite for reform, it may prove difficult to encourage new participants in the fix, Ms Dempster said, since they become open to potential allegations of abusing the market, and have little incentive to be involved in the process itself. Deutsche Bank gave up its seat on the gold fix panel earlier this year as scrutiny on the benchmark intensified.

“There is a view that the high risk and low reward could discourage potential participation” she said.

Including other parties in the London gold fix would be the biggest change since its inception in 1919.

The benchmark has been an influential reference point for traders in the world’s biggest gold market ever since.

Ms Dempster said there was “no appetite” to abandon the fix, and that negotiators wanted to reform, rather than replace it.